Given the structural factors dragging down EU potential, a labour productivity revival is the only hope for sustaining growth But unfortunately the slowdown appears to be structural, not cyclical Both capital per worker and, especially, MFP have been lingering since the beginning of the century

The last Regional Outlook highlighted the growing divide between the top regions (frontier) and the rest in terms of productivity levels.

This divide had grown by 60% OVER XX. % over the last almost two decades. However, since the crisis (as noted by the red line) it seems that wider gap has stabilised.

What does it mean This is taken on an OECD level, let’s zoom in on EU countries.

There are two general types of countries in this picture: those where the top is pulling ahead, and those where the others are catching up.

France, UK, and Sweden are among those countries where national productivity growth was mainly generated in the frontier region (countries where the high productivity region, typically the capital city is black, and where the other region are light blue, and falling behind).

In Germany, Austria or Poland, for example, national productivity growth is mainly generated by regional productivity catching up, where the dark blue is found.

************************

We have identified two types of countries in the EU.

Catching up dynamics: Austria, Germany, Czech Republic, Spain, Italy, Poland, Portugal and Romania. Most of the productivity performance of these countries is the result of the catching-up of the lagging regions. The frontier regions sustain high productivity levels, but productivity growth dynamics occur elsewhere in the country.

Frontier dynamics: Bulgaria, Denmark, France, United Kingdom, Finland, Greece, Hungary, Netherlands, Slovak Republic and Sweden. In these countries, most of the productivity dynamics is concentrated at the frontier with limited effects from the catching-up process.

The countries where the productivity growth is coming from regions other than the frontier, they saw that had frontier regions were not as dynamic in terms of productivity growth (black graph).

For those countries where growth was concentrated in the frontier, (blue graph), their top regions experienced higher productivity growth but at the cost of greater regional inequalities.

Policies need to do more to ensure that these productivity improvements are shared so that this tradeoff between higher growth in the frontier and regional inequality is not inevitable.

Inclusive growth requires acting at the relevant scale and looking beyond national averages. Regional policies are thus one of the important answers.

Proximity to cities is key for the growth of those rural areas. They experienced higher average productivity growth rates than any other region type.

While citizens are concerned about globalisation, they also need to see that actually what underpins the rise in wages is greater productivity, and this is found in sectors that are exposed to international competition. It does not mean the products are necessarily exported, but simply that those are areas where firms produce products that need to be competitive even beyond the local market. The data show that those regions that are catching up, as opposed to falling behind, were those that had a larger and growing share of their economy in these tradable sectors. The challenge is to ensure the accompanying skills changes to shift from one type of tradable sector to another. Policy needs to support regions as they anticipate and adjust to different shocks.

One of the common errors is to think that promoting inclusive growth means boosting less tradable activities such as construction. But as we have seen with the boom and bust experiences of some regions with the crisis, those jobs are quickly gained and quickly lost, and at a perhaps longer term price of insufficiently developing those tradable sectors more durable over the long term.

This is particularly striking with manufacturing. In countries that lost more employment in manufacturing, regional income gaps widened. This message was a core element of the OECD’s annual Ministerial Council Meeting.

It highlights that policies to support regions need to be seen as policies to help countries build resilience and adapt to industrial change so that they not only boost productivity, but also access to jobs.

ADD COUNTY NAMES

In the last graph we saw that Portugal experienced lots of manufacturing job losses and a widening dispersion of regional income inequality.

The example of Norte highlights the dynamics whereby productivity may go up in sectors like manufacturing, but the other side of the story is the job losses and the resulting regional inequalities when other sectors are not able to employ those left behind.

While some sectors that are not tradable (i.e. not exposed to international competition) may be a source of jobs, as we see with the crisis, that kind of model is not always sustainable. Regional policies need to therefore ensure that they ensure the right conditions for sectors that are indeed tradable are able to thrive, as over the long term they will underpin the health of the region.

Inclusive growth requires acting at the relevant scale and looking beyond national averages. Regional policies are thus one of the important answers.

30

Private law vs. public law In general, two IMC models can be distinguished: the public law model and the private law model. Under the public law model the contractual and the institutionalized forms of IMC are regulated in some detail by public law. Public law regulates agreements for the joint management of functions or the delegation of functions by one municipality to another. Public law also regulates the institutionalized forms of IMC and generally envisages mandatory functions in certain areas and strong state supervision in both financial and legal matters. Under the public law model, the responsibilities exercised by municipalities are clearly exclusive. The transfer of a responsibility to another municipality or to an IMC body automatically removes this responsibility from the transferring municipality. The private law model is based on the freedom of local authorities to pragmatically opt for the areas and forms of IMC based on the modalities and entities envisaged by this law, such as contracts, associations and commercial enterprises. In practice, both models co-exist in Western Europe. The public law model is favoured for its greater democratic legitimacy and is more common in countries such as France, Spain and Portugal where community-based forms of local government prevail. The private law model dominates in Norway or Sweden where there is greater focus on efficient public service delivery than direct accountability to the municipal council. In countries where there is no specific legislative framework for IMC, municipalities have no choice but to establish it under private law. For instance, in Albania, the law allows IMC but does not regulate it. IMC for the production of public utility services therefore tends to take place through commercial companies. In Romania, many IMC activities formerly took place under the private law association legal form. The IMC legislation introduced in 2006 created public law Inter-Community Development Associations. As a result, many IMCprivate law associations changed their status to public law associations. In many Western European countries, the traditional form of IMC is that of public law associations specifically focused on – but not only, depending on the country – the delivery of technical public utility services (water treatment and distribution or waste management) with the aim of reaping economies of scale. However, with the growth of urbanization and the appearance of city-regions, the need gradually emerged for different, more integrated and strategic forms of IMC concerned also with a wide variety of urban development issues such as economic development planning, spatial planning, housing policy, public transport and urban infrastructure development. The French communautés are typical federative forms of IMC that closely resemble a new tier of local self-government. They have mandatory functions and the power to raise taxes, and decisions are taken by the majority of the IMC council rather than unanimity, as in the more traditional IMC associative forms. The equivalent institutions in the Netherlands, at least as far as the communautés urbaines are concerned, are the metropolitan regional corporations, which have a mix of mandatory and voluntary functions, and receive central government grants in a series of policy sectors.

Dedicated land use policies primarily work by restricting how land can be used. They pay little attention to the incentives that businesses and individuals have to use land.

By paying greater attention to the incentives that public policy provides for land use, planning can become less restrictive and more effective Taxes and fiscal systems matter most Regulatory and economic instruments need to be combined Effective governance mechanisms are a prerequisite for a successful implementation

As regional development actors, subnational governments face a series of common challenges – coordination, capacity and framework conditions.

So to support national and subnational governments make the most of public investment and strengthen regional development, the OECD Recommendation was developed specifically to help governments work through these common challenges….

Why this Recommendation Elements of rationale: Public investment -- Key tool for regional development (new paradigm Regional Development Policy – investment rather than subsidies) PI largely done at the sub-national level  Raises critical coordination and capacity challenges to make better use of the funding and leverage private investment – IN ALL CONTEXTS -- We observed these coordination and capacity challenges in a quite systematic manner in all OECD countries – whatever the institutional context /type of decentralisation. (what matters is mutual dependency rather than the level of decentralisation) The Principles group 12 recommendations into 3 pillars: recommendations to i) improve coordination across jurisdictions, levels of government and sectors; (ii) strengthen sub-national capacities from the design to ex-post evaluation and iii) improve framework conditions. You can see on the slide the 12 principles, I wont enter into details. These are broad guidelines as they need to apply to 34 very different contexts. Since the adoption of the instrument, we are now providing more detailed and concrete guidance to countries. Timely Recommendation: great focus on investment and infrastructure at the international level (G20), little focus on governance & institutions… but growing interest Principles integrated in the new GOV work on the Governance of Infrastructure

We are working with the EC on exploring frontier academic research and its implications for the design of economic development policies for regions and cities in general. THis is work in progress to be launched in early 2018, but a few emerging lessons are important to highlight.

Indeed, beyond the “what” of policies is the ”how”. But we continue to make some common mistakes in the how. Many of the innovations in academic theory are related to behavioural insights that consider how people and organisations respond to the different tools often used when higher levels of government give money to lower levels to promote regional development.

The contribution of regions to the productivity of nations - Oliveira Martins, OECD

7.
A majority of regions have flat or declining
labour productivity catching-up
Type of regions Employment
share in
2000
GDP share in
2000
Annual avg.
GDP growth,
2000-13
GDP growth
contribution
Frontier 16.1% 20.1% 1.7% 21.9%
Catching up 20.3% 18.2% 2.2% 25.3%
Keeping pace 38.9% 39.1% 1.3% 30.4%
Diverging 24.6% 22.6% 1.6% 22.4%
OECD average 1.6%
Note: Frontier regions are fixed for the 2000-13 period. In four countries the values for 2000 or 2013
were extrapolated from growth rates over a shorter time period as data for 2000 or 2013 were not
available. The countries are FIN (2000-12), HUN (2000-12), NLD (2001-13) and KOR (2004-13).
 62% of OECD GDP is generated in regions were productivity is
Keeping pace or Diverging. They contributed to 53% of GDP growth

8.
The contribution of regions to national productivity
growth: two main types of EU countries
8
Source: Bachtler, Oliveira Martins, Wostner and Zuber(2017), “TOWARDS
COHESION POLICY 4.0”, Regional Studies Association.
Type-I (distributed): Austria, Germany, Czech Republic, Spain,
Italy, Poland, Portugal and Romania. Most of the productivity
performance of these countries is the result of the catching-up of the
lagging regions. The frontier regions sustain high productivity levels, but
productivity growth dynamics occur elsewhere in the country.
Type-II (concentrated): Bulgaria, Denmark, France, United
Kingdom, Finland, Greece, Hungary, Netherlands, Slovak
Republic and Sweden. In these countries, most of the productivity
dynamics is concentrated at the frontier with limited effects from the
catching-up process.

9.
Illustrations of the two regional
productivity models, 2000-2014
NB: The contribution of a region is defined as the difference between the national annual
average labour productivity growth rate and the same rate excluding the indicated region, cf.
OECD Regional Outlook (2016).
GERMANY (TYPE I) FRANCE (TYPE II)

10.
Illustrations of the two regional
productivity models, 2000-2014
The contribution of a region is defined as the difference between the national annual average
labour productivity growth rate and the same rate excluding the indicated region, cf. OECD
Regional Outlook (2016).
UK (TYPE II)SPAIN (TYPE I)

11.
Distributed model (Type I), 2000-2014
The contribution of a region is defined as the difference between the national annual average
labour productivity growth rate and the same rate excluding the indicated region, cf. OECD
Regional Outlook (2016).
SPAIN ITALY

12.
Distributed model (Type I), 2000-2014
The contribution of a region is defined as the difference between the national annual average
labour productivity growth rate and the same rate excluding the indicated region, cf. OECD
Regional Outlook (2016).
POLAND PORTUGAL

13.
Concentrated model (Type II), 2000-2014
SWEDEN
The contribution of a region is defined as the difference between the national annual average
labour productivity growth rate and the same rate excluding the indicated region, cf. OECD
Regional Outlook (2016).
DENMARK

14.
Concentrated model (Type II), 2000-2014
GREECE
The contribution of a region is defined as the difference between the national annual average
labour productivity growth rate and the same rate excluding the indicated region, cf. OECD
Regional Outlook (2016).
HUNGARY

15.
Geography of
productivity
convergence
relative to
national
frontiers in
European
regions,
2000-14

28.
The contribution of
regions needs to be
organised through a
proper Multi-level
governance system

29.
The role of decentralisation
 Designing place-based policies is too complex task to be
centralised. A central government cannot have as many
policies as different types of cities and regions
 But decentralisation needs to be organised as a
partnership and not only as a process of autonomy and
devolution of competencies
 Decentralisation works better when it is done in a process
allowing for the asymmetry of capacities at the local level
and experimentation (learning-by-doing)

33.
Make planning more flexible and policy coordination
may improve Housing sectors
How land is used
Public policies aimed at steering
land use
• Spatial planning
• Transport planning
• Land use planning
• Environmental regulations
• Building code regulations
Public policies not targeted at land use
• Tax policies
• Transport taxes and subsidies
• Fiscal systems and inter-governmental
transfers
• Agricultural policies
• Energy policies
How land is permitted to be used How individuals and businesses
want to use land

34.
• Invest using an integrated strategy tailored to different places
• Adopt effective co-ordination instruments across levels of
government
• Co-ordinate across SNGs to invest at the relevant scale
Pillar 1
Co-ordinate across
governments and
policy areas
• Assess upfront long term impacts and risks
• Encourage stakeholder involvement throughout investment cycle
• Mobilise private actors and financing institutions
• Reinforce the expertise of public officials & institutions
• Focus on results and promote learning
Pillar 2
Strengthen capacities
and promote policy
learning across levels of
government
• Develop a fiscal framework adapted to the objectives pursued
• Require sound, transparent financial management
• Promote transparency and strategic use of procurement
• Strive for quality and consistency in regulatory systems across
levels of government
Pillar 3
Ensure sound framework
conditions at all levels of
government
The OECD Recommendation on Effective Public
Investment across Levels of Government

35.
 The administrative burden in many programmes
remains high
 We often under-estimate the importance of building
relationships (and trust) across levels of government
 We continue to expect results when organisational
and individual incentives are aligned to the contrary
 We create systems to promote performance but in
the end we promote compliance
Governance lessons for the redesign
of regional policies
Source: Proceedings of EC/OECD Governance seminars (forthcoming)